5 Reasons Why KeyBanc Upgraded Paycom

Payroll and HR provider Paycom Software Inc PAYC is a high-quality SaaS name, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc analyst Brent Bracelin upgraded Paycom from Sector Weight to Overweight with a $105 price target, suggesting roughly 25-percent upside from current levels.

The Thesis

Paycom's proven direct sales strategy could sustain 20-percent-plus revenue growth through share gains, irrespective of economic cycles, Bracelin said in a Monday note. (See the analyst's track record here.) 

"We believe longer-term plans to double the footprint to 90 office locations ensures an extended runway to sustain growth," the analyst said. 

KeyBanc views Paycom as a company with a best-in-class efficiency model, with more than 40-percent EBITDA margins. The 2018 guidance at the midpoint for 25-percent growth and 40-percent EBITDA margins appears conservative, Bracelin said. 

Low penetration of a large, $26-billion-plus total addressable market could be positive for Paycom, the analyst said. The SaaS company is gaining the most in mid-market, while  Workday Inc WDAY is gaining the most in large enterprises, even as Automatic Data Processing ADP and Paychex, Inc. PAYX are losing share at the low end, Bracelin said. 

KeyBanc projects little-to-no Affordable Care Act risk through 2019.

Paycom shares, trading at 18 times EV/EBITDA on 2019 estimates, present a favorable risk-reward scenario, the analyst said. 

The Price Action

Paycom shares are up about 62 percent over the past year.

The stock was up 3.51 percent at $87.48 at the time of publication Tuesday morning. 

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Photo courtesy of Paycom.